A synthetic leasing contract is an off-balance sheet lease in which an ad hoc vehicle founded by the operating company or parent company acquires an asset and then leases it back to the operating company. The synthetic leasing contract is popular with publicly traded companies looking to improve debt and equity ratios, as assets are recorded on the balance sheet of the allocation entity and are recorded in the parent/company`s income statement. For the most part, all of the lessor`s activities involve assets leased to the taker. The underwriter essentially bears all residual risks and essentially benefits from all the residual benefits of the leased assets. Through a synthetic leasing contract, the ad hoc entity treats the lease as a tax lease and accounts for depreciation and amortization expenses on its income. In essence, the synthetic leasing contract allows a company to lease an asset to itself. However, the assets are not included in the parent company`s balance sheet. Instead, the parent company treats them as a corporate leasing for accounting purposes and accounts in the profit and loss account. Synthetic leases were common in the late 1990s and early 100s, left after 2008 and are now undergoing resuscitation. In general, they are only offered by institutions with the necessary resources to navigate the regulatory structure that are trying to use these agreements.
A synthetic leasing contract is off-balance sheet financing that is considered a financial lease and a tax loan. Building a clean facility can be costly; However, the synthetic lease offers the possibility of making the process less expensive. The lessor has not made any material investments that are at risk during the term of the lease. The synthetic lease also has some drawbacks: the courts have made a number of decisions on both sides. A case frequently cited by the IRS in support of the argument that the party must be held in the form of a transaction is Commissioner/V. Danielson, in which taxpayers were denied treatment of capital gains on the sale of shares because the original agreement between the parties allocated a portion of the shares to a non-capital asset. The underwriter intends to obtain the benefits of off-balance sheet accounting for both the asset and the lease obligation to finance the acquisition of the asset.